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Healthy pressure for a CSL successor

Brian McNamee's CSL share purchase at $60.40 sets a high bar for Paul Perreault. But new products and opportunities for deeper penetration mean there’s plenty of potential to unlock.

This week CSL chief executive Brian McNamee set a big challenge for his successor Paul Perreault – McNamee paid up to $60.40 for CSL shares in CSL’s buyback program. That is over double the price that the stock was selling at just over a year ago and 30 times last year’s earnings per share.

After an amazing 22 years as chief executive McNamee believes he has set CSL up to continue to grow and by buying shares at such a high price to earnings multiple McNamee is in effect setting a benchmark for Perreault to unlock the future potential. Is also a vote of confidence in his successor. Perreault takes over on July 1.

So today I will look at this remarkable company and how Perreault has been set the challenge to unlock the growth potential still in CSL.

CSL and Woodside vie for tenth place on the Australian market capitalisation list. Yesterday CSL was out of the top ten at number 11 because the shares have slipped since the $60.40 purchase.

The Australian top ten list only has two miners: BHP and Woodside (we are very much a banking country). Yet in a strange way CSL is akin to a miner which processes downstream the material it mines. But instead of mining iron ore or coal from the ground CSL extracts plasma from American citizens and that has become the core of its global business.

Of course in Australia plasma collection is part of the Red Cross blood collection business but the raw material obtained via the global Red Cross movement is relatively small compared to the massive American plasma harvest.

CSL’s main rival, US based Baxter, has a similar number of US collection ‘mines’ (between 75 and 80) but CSL on average collects twice as much plasma from each of its collection centres. In other words CSL ‘mines’ are far more productive because CSL has invested heavily in its collection systems and has achieved a 70 minute turnaround around for those contributing plasma. In America regular contributors of plasma receive around $25 per visit, remembering that in the US (unlike Australia) the red blood cells of a plasma contributor are circulated back into their body. Accordingly they can donate plasma twice a week. This enormous CSL plasma collection process in America has helped many impoverished Americans and students, given that there are limited unemployment benefits and education is expensive.

CSL’s unique US plasma collection operation has spawned one of the most successful pharmaceutical companies in the world. Plasma has proved to be a remarkable substance to generate new life-saving pharmaceutical products. And there are more to come and so Perreault is planning to continue to increase investment in research and development.

Currently CSL is working on a plasma based product that will substantially reduce the incidence of death from heart disease. It is not yet proven but if all goes well it will be available in 2017. If successful it will be an enormous boost to the company’s growth. In the US the National Institute of Health, in conjunction with CSL’s rival Baxter, is looking at a plasma derivative to curb Alzheimer’s. The Alzheimer’s product is in the early stages of testing and only works for those who gain early detection but early Alzheimer’s detection is an area where Melbourne leads the world.

CSL earned around $1.96 per share in 2011-12 and brokers are expecting it will earn in the vicinity of $2.50 in the current year and that earnings per share will move on to around $3.40 by 2014. This remarkable growth momentum will be partly generated by the CSL economies in plasma collection and the new products coming forward from the material. But will also be generated by the fact that many of CSL’s plasma products do not have a large penetration in US hospitals and those of many other countries. There is an enormous future market there. Theoretically China should also be an big new market but there are cultural problems in marketing blood products in China.

The McNamee $60.40 CSL share buyback is also a reminder to Perreault not to make the same mistake as the pharmaceutical giants who got big for the sake of getting bigger. It has been an absolutely disastrous exercise and they are now selling off assets and running in all sorts of directions as they try and recoup what has been a catastrophic set of management mistakes. Apart from its Australian operation, where it is heavily into flu vaccinations, CSL concentrated on plasma products.

CSL’s biggest danger is that there will be a discovery of a synthetic plasma to source a rival product. But its biggest upside comes from greater product penetration in hospitals and its research including work on heart attacks and Alzheimer’s. However if there was a sudden major research breakthrough CSL would probably have difficulty ramping up its plasma collection. But it would be a further tribute to the correctness of focussing on this remarkable human derived raw material, where CSL is the leading company in global collection and processing.

Paul Perreault, who came to the company via the Behring takeover, doesn’t plan to change the strategy. That’s why McNamee is confident $60.40 will deliver value for CSL.

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